Busines Economics FINAL Script

8/15/2019 Busines Economics FINAL Script

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Break-even point

Break even point is the level of sales at which pro t is zero . According to this de nition, this is the quantity where the total revenue is just

su cient to cover the total cost.If we know the quantity then we can deter ine the total revenue required to

cover the total cost. !o, the "reak#even point is a special case of target revenue,where target revenue is $ %"reaking even&. 'his is very i portant for nancialanalysis.

'herefore, in econo ics ( "usiness, speci cally cost accounting, the "reak#evenpoint %B)*& is the point at which+

cost or e penses and revenue are equal %'- '/& there is no net loss or gain, and one has 0"roken even1 %2 $ ( 3 $& selling price equals full cost of sale %* -o!& 'he "reak even point can "e calculated using either the equation method or

contribution margin method.'hese two ethods are equivalent.

Equation Method

'he equation ethod centers on the contri"ution approach to the incomestatement . 'he for at of this state ent can "e e pressed in equation for asfollows+

o *ro t %'otal revenue 4 5aria"le e penses& 4 6i ed e penses /earranging this equation slightly yields the following equation, which is widely

used in cost volu e pro t %-5*& analysis+o 'otal revenue 5aria"le e penses 7 6i ed e penses 7 *ro t


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6or e a ple we can use the following data to calculate "reak even point.o !ales price per unit 89:$o 5aria"le cost per unit 8;:$o 'otal ed e penses 8 8;:$ > 7 8 8 8


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sold provides a certain a ount of contri"ution argin that goes toward coveringed cost.

'his approach is particularly suita"le in situations where a co pany has ultipleproducts lines and wishes to co pute a single "reak even point for the co panyas a whole.

'o nd out how any units ust "e sold to "reak even, we can use+ a. nit -ontri"ution Gargin approach B. -ontri"ution Gargin /atio approach nit -ontri"ution Gargin %-&, or dollar contri"ution per unit, is the selling price

per unit %*& inus the varia"le cost per unit %A5-&

- *#A5-

nit -ontri"ution GarginHthe arginal pro t per unit sale is one of the key"uilding "locks of "reak#even analysis

6or e a ple we can use the following data to calculate "reak even point.o !ales price per unit 89:$o

5aria"le cost per unit 8;:$o 'otal ed e penses 8


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-onsider a situation in which a "usiness anager deter ines that a particularproduct has a contri"ution argin ratio of


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Khat should the "usiness anagers do, if they think they want "e a"le to sellthat quantityL

If they think they cannot sell that any, to ensure via"ility they could+o 'ry to reduce the ed costs %"y renegotiating rent for e a ple, or

keeping "etter control of telephone "ills or other costs&o 'ry to reduce varia"le costs %the price it pays for the ta"les "y nding a

new supplier&o Increase the selling price of their ta"les.o Any of these would reduce the "reak even point. In other words, the

"usiness would not need to sell so any ta"les to ake sure it could payits ed costs.

'he ain advantages of "reak even point analysis is that it e plains therelationship "etween cost, production, volu e and returns.It can "e e tended to show how changes in ed cost, varia"le cost, co odityprices, revenues will eMect pro t levels and "reak even points.

Break even analysis is ost useful when used with partial "udgeting, capital"udgeting techniques.'he ajor "ene ts to use "reak even analysis is that it indicates the lowesta ount of "usiness activity necessary to prevent losses.

#ssumption of Break Even $oint

'he Break#even Analysis depends on three key assu ptions+o Average per#unit sales price %per#unit revenue&o Average per#unit costo Gonthly ed costs

#verage per-unit sales price %per-unit revenue&

'his is the price received per unit of sales. !ales discounts and special oMersshould "e taken into account. 'hose nu "er could "e o"tained fro !ales6orecast Nepart ent.'he ost co on questions a"out this input relate to averaging any diMerentproducts into a single esti ate.

'he analysis requires a single nu "er, and if you "uild your !ales 6orecast rst,then you will have this nu "er.


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o Oou are not alone in this, the vast ajority of "usinesses sell ore thanone ite , and have to average for their Break#even Analysis=

#verage per-unit cost

'his is the incre ental cost, or varia"le cost, of each unit of sales. If you "uygoods for resale, this is what you paid, on average, for the goods you sell. If yousell a service, this is what it costs you, per dollar of revenue or unit of servicedelivered, to deliver that service. If you are using a nits#Based !ales 6orecastta"le %for anufacturing and i ed "usiness types&, you can project unit costsfro the !ales 6orecast ta"le.If you are using the "asic !ales 6orecast ta"le for retail, service and distri"ution"usinesses, use a percentage esti ate, e.g., a retail store running a :$ arginwould have a per#unit cost of .:, and a per#unit revenue of ;.

Monthly "'ed costs

'echnically, a "reak#even analysis de nes ed costs as costs that wouldcontinue even if you went "roke./egular running ed costs, including payroll and nor al e penses %totalonthly Pperating ) penses& should "e used instead. 'his will give you a "etterinsight on nancial realities. If averaging and esti ating is di cult, use your*ro t and 2oss ta"le to calculate a working ed cost esti ate H it will "e arough esti ate, "ut it will provide a useful input for a conservative Break#evenAnalysis.

(imitations

Break#even analysis is only a supply side %i.e. costs only& analysis, as it tells younothing a"out what sales are actually likely to "e for the product at these variousprices.It assu es that ed costs %6-& are constant. Although, this is true in the shortrun, an increase in the scale of production is likely to cause ed costs to rise.It assu es average varia"le costs are constant per unit of output, at least in therange of likely quantities of sales. %i.e. linearity&It assu es that the quantity of goods produced is equal to the quantity of goodssold %i.e., there is no change in the quantity of goods held in inventory at the"eginning of the period and the quantity of goods held in inventory at the end of

the period&.In ulti#product co panies, it assu es that the relative proportions of eachproduct sold and produced are constant %i.e., the sales i is constant&.It is "est suited to the analysis of one product at a ti e. It ay "e di cult toclassify a cost as all varia"le or all edQ and there ay "e a tendency tocontinue to use a "reak even analysis after the cost and inco e functions havechanged.

Cost classi"cation for decision making %)eek *+&

Cost classi"cation for decision making -osts can "e classi ed for decision aking. -osts are i portant feature of any

"usiness decisions.6or the purpose of decision aking, costs are usually classi ed as diMerentialcost, opportunity cost, and sunk cost.


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,i erential cost and di erential revenue Necisions involve choosing "etween alternatives. In "usiness, each alternative

will have certain costs and "ene ts that ust "e co pared to the costs and"ene ts of the other availa"le alternatives.A diMerence in cost "etween any two alternatives is known as diMerential cost.A diMerence in revenue "etween any two al ternatives is

In general the diMerence %cost and revenue& "etween alternatives are relevant indecision aking. 'hose ite s that are the sa e under all alternatives can "eignored. Necisions involve choosing "etween alternatives. In "usiness, each alternativewill have certain costs and "ene ts that ust "e co pared to the costs and"ene ts of the other availa"le alternatives.A diMerence in cost "etween any two alternatives is known as diMerential cost.A diMerence in revenue "etween any two al ternatives is

In general the diMerence %cost and revenue& "etween alternatives are relevant indecision aking. 'hose ite s that are the sa e under all alternatives can "eignored.

'he accountantJs diMerential cost concept can "e co pared to the econo istJsarginal cost concept. In speaking of changes in cost and revenue, theecono ists e ploy the ter arginal cost and arginal revenue.'he revenue that can "e o"tained fro selling one ore unit of product is calledarginal revenue, and the cost involved in producing one ore unit of a productis called arginal cost.'he econo ists arginal cost is "asically the sa e as the accountantJsdiMerential concept applied to a single unit of output.

) a ple R co putation of diMerential cost, diMerential revenues and diMerential netoperating inco e+

'he anage ent of 3ala y co pany has two alternatives to choose fro .-o pute diMerential revenue, diMerential cost and diMerential net operatinginco e fro the infor ation of two al ternatives given "elow+

pportunity cost


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nlike other types of cost, opportunity cost does not require the pay ent of cashor its equivalent.Ppportunity cost is the potential "ene t or inco e that is given up when onealternative is selected over another.Al ost every alternative has an opportunity cost. It is not entered in theaccounting records "ut ust "e considered while aking decisions.

'o illustrate this i portant concept, consider the following e a ples+ 5icki has a part#ti e jo" that pays her 89$$ per week while attending

college. !he would like to spend a week at the "each during spring "reak,and her e ployer has agreed to give her the ti e oM, "ut without pay.'he 89$$ in lost wages would "e an opportunity cost of taking week oM to"e at the "each.

Oou have a jo" in a co pany that pays you 89:,$$$ per year. 6or a "etterfuture, you want to get a GasterSs degree "ut cannot continue your jo"while studying. If you decide to give up your jo" and return to school toearn a GasterSs degree, you would not receive 89:,$$$. Oour opportunitycost would "e 89:,$$$.

Sunk cost A sunk cost is a cost that has already "een incurred and that cannot "e changed

"y any decision ade now or in future. 'hese costs should not "e taken into account while aking any decision "ecause

no action can revers the . 6or e a ple, a co pany purchased a achine several years ago. Nue to change

in fashion in several years, the products produced "y the achine cannot "e soldto custo ers. 'herefore the achine is now useless or o"solete. 'he priceoriginally paid to purchase the achine cannot "e recovered "y any action and istherefore a sunk cost.

'o illustrate a sunk cost, assu e that a co pany paid 8:$,$$$ several years agofor a special purpose achine. 'he achine was used to ake a product that isnow o"solete and is no longer "eing sold. )ven though in hindsight the purchaseof the achine ay have "een unwise, no a ount of regret can undo thatdecision.

And it would "e folly to continue aking the o"solete product to recover theoriginal cost of the achine. In short, the 8:$,$$$ originally paid for the achinehas already "een incurred and cannot "e diMerential cost in any future decision.6or this reason, such costs are said to "e sunk costs and should "e ignored indecision aking.

/uality

>uality is the totality of features and characteristics of a product or service that

"ear on its a"ility to satisfy stated or i plied needs. 'he level of quality ay "e very low in so e products and very high in others.It is not always true that a product with high quality will also "e costly.-onversely, any ti es an e pensive product is low in quality. A cup of tea orcoMee taken in a highway cafe ay taste "etter than what one gets in a ve starhotel#though the cost in the two places will "e re arka"ly diMerent.

A high quality product is often e pensive "ecause ore ti e and eMorts go intoanufacturing such product with its close tolerances and fewer defects. *roductquality level also reTects the i age of the co pany that produces it.

)hat is 0/M1

'>G stands for 'otal >uality Ganage ent. It is one of the ost eMective and

least understood corporate strategies.'>G is a anage ent philosophy for continuously i proving overall "usinessperfor ance "ased on leadership, supplier quality anage ent, vision and plan


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state ent, evaluation, process control and i prove ent, product design, qualitysyste i prove ent, e ployee participation, recognition and reward, educationand training, and custo er focus.

0otal /uality Management and IS -2+++

>uality eans satisfying the custo er. According to '>G, the quality is totallyde ned "y the custo erSs perceptions. It doesnSt atter what we think, itatters what our custo ers think, and the custo ersS perceptions areconstantly changing.I!P#U$$$ is the generic na e used to descri"e the International !tandardPrganization %I!P& U$$$ series of anage ent syste standards. 'he peakstandard of I!P#U$$$ series is I!P#U$$;, which is titled V>uality !yste sHGodelfor quality assurance in design@develop ent, production, installation andservicing.

/uality Costs A product that eets or e ceeds its design speci cations and is free of defects

that ar its appearance or degrade its perfor ance is said to have high quality

of confor ance.Wote that if an econo y car is free of defects, it can have a quality ofconfor ance that is just as high as defect#free lu ury car. 'he purchasers ofecono y cars cannot e pect their cars to "e as opulently as lu ury cars, "ut theycan and do e pect to "e free of defects.

In process i prove ent eMorts, quality costs or cost of quality is a eans toquantify the total cost of quality #related eMorts and de ciencies

*reventing, detecting and dealing with defects cause costs that are called qualitycosts or costs of quality.

'he use of the ter 0quality cost0 is confusing to so e people. It does not referto costs such as using a higher grade leather to ake a wallet or using ;XY goldinstead of gold plating in jewelry. Instead the ter quality cost refers to all of thecosts that are incurred to prevent defects or that result fro defects in products.

Pnce categorized, quality costs can serve as a eans to easure, analyze,"udget, and predict.

'he quality costs do not 3ust relate to anufacturingQ rather, they relate to all theactivities in a co pany fro initial research and develop ent %/ ( N& throughcusto er service.'otal quality cost can "e quite high unless anage ent gives this area specialattention.

By classifying quality#related entries fro a co panyJs general ledger ,anage ent and quality practitioners can evaluate invest ents in quality "asedon cost i prove ent and pro t enhance ent.

4our broad groups of quality costs >uality costs can "e "roken down into four "road groups. 'hese four groups are

also ter ed as four %X& types of quality costs.'wo of these groups are known as prevention costs and appraisal costs. 'heseare incurred in an eMort to keep defective products fro falling into the hands ofcusto ers.'he other two groups of costs are known as internal failure costs and e ternalfailure costs. Internal and e ternal failure costs are incurred "ecause defects areproduced despite eMorts to prevent the and therefore these costs are also

known as costs of poor quality.

$revention Costs

https://en.wikipedia.org/wiki/Process_improvementhttps://en.wikipedia.org/wiki/Quality_(business)https://en.wikipedia.org/wiki/Ledgerhttps://en.wikipedia.org/wiki/Process_improvementhttps://en.wikipedia.org/wiki/Quality_(business)https://en.wikipedia.org/wiki/Ledger


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3enerally the ost eMective way to anage quality costs is to avoid havingdefects in the rst place. It is uch less costly to prevent a pro"le fro everhappening than it is to nd and correct the pro"le after it has occurred.*revention costs support activities whose purpose is to reduce the nu "er ofdefects.

E'ternal 4ailure Costs Khen a defective product is delivered to custo er, e ternal failure cost is theresult.) ternal failure costs include warranty, repairs and replace ents, productrecalls, lia"ility arising fro legal actions against a co pany, and lost salesarising fro a reputation for poor quality.!uch costs can deci ate pro ts.

In the past, so e anagers have taken the attitude, 02etJs go ahead and shipeverything to custo ers, and weJll take care of any pro"le s under thewarranty.0 'his attitude generally results in high e ternal failure costs, custo erill will, and declining arket share and pro ts.

#ppraisal costs Any defective parts and products should "e caught as early as possi"le in theproduction process.Appraisal costs, which are so eti es called inspection costs, are incurred toidentify defective products "efore the products are shipped to custo ers.nfortunately perfor ing appraisal activates doesnJt keep defects frohappening again and ost anagers realize now that aintaining an ar y ofinspectors is a costly and ineMective approach to quality control.

Internal failure costs 6ailure costs are incurred when a product fails to confor to its design

speci cations. 6ailure costs can "e either internal or e ternal. Internal failurecosts result fro identi cation of defects "efore they are shipped to custo ers.

'hese costs include scrap, rejected products, reworking of defective units, anddownti e caused "y quality pro"le

(ong term cost curve %)eek **&

(ong-term vs Short-term If the short term limits hich inputs can be changed then! in the long term! all

inputs! variable and "'ed! can be altered. 4or e'ample5- the e'isting factory could be undertaken by buying the ad3oining unit and

knocking the t o into one6- or another premises could be purchased else here6- or a rival company could be acquired.

#dditionally! in the long term! the business can diversify into other activities. 0his givesmuch greater 7e'ibility.

(ong term cost curve # business8s long term cost curves are derived from a very large number of short

term cost curves. #t some point! the business ill decide hat its intended scale of production illbe6 in turn this ill determine the particular technology hich it ill employ.

4igure illustrates the long run total cost curve %(90C& of a business.


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4igure illustrates the long run average cost curve %(9#0C& of a business.

4igure illustrates the long run average cost curve %(9#0C& of a business.

(ong run average cost curve %(9#0C& I plicit in this curve are the

assu ptions that the "usinesswill seek to co "ine itsresources in the ost e cientanner %known as the leastcost co "ination of resources&,that the prices of the inputs ituses are constant and that thestate of technology does notchange.As can "e seen, the 2/A'- has"roadly the sa e shape as the

short ter average cost curve, although it is Tatter.

As output e pands in the long ter , so long run or long ter average costs falland the "usiness e periences econo ies of scale.

(ong run average cost curve %(9#0C& I plicit in this curve are the assu ptions that the "usiness will seek to co "ine

its resources in the ost e cient anner %known as the least cost co "inationof resources&, that the prices of the inputs it uses are constant and that the stateof technology does not change.As can "e seen, the 2/A'- has "roadly the sa e shape as the short ter averagecost curve, although it is Tatter.As output e pands in the long ter , so long run or long ter average costs falland the "usiness e periences econo ies of scale.

9eturns to scale vs Economies of scale


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In econo ics , returns to scale and econo ies of scale are related "ut diMerent ter sthat descri"e what happens as the scale of production increases in the long run, whenall input levels including physical capital usage are varia"le %chosen "y the r &.'he ter returns to scale arises in the conte t of a r Js production function . Ite plains the "ehavior of the rate of increase in output %production& relative to theassociated increase in the inputs %the factors of production& in the long run. In the long

run all factors of production are varia"le and su"ject to change due to a given increasein size %scale&.Khile econo ies of scale show the eMect of an increased output level on unit costs,returns to scale focus only on the relation "etween input and output quantities.

9eturns 0o Scale

9eturns 0o Scale'he laws of returns to scale are a set of three interrelated and sequential laws+

2aw of Increasing /eturns to !cale 2aw of -onstant /eturns to !cale, and 2aw of Ni inishing returns to !cale

9eturns 0o ScaleIf output increases "y that sa e proportional change as all inputs change then there areconstant returns to scale %-/!&.If output increases "y less than that proportional change in inputs, there are decreasingreturns to scale %N/!&.If output increases "y ore than that proportional change in inputs, there areincreasing returns to scale %I/!&.A r Js production function could e hi"it diMerent types of returns to scale in diMerentranges of output. 'ypically, there could "e increasing returns at relatively low outputlevels, decreasing returns at relatively high output levels, and constant returns at oneoutput level "etween those ranges

Economies of scale

)cono ies of scale are factors that cause the average cost of producingso ething to fall as the volu e of its output increases.Zence it ight cost 8


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copy "ecause the ain ele ents of cost in producing a agazine %editorial anddesign& are unrelated to the nu "er of agazines produced.

'here are two types of econo ies of scale+[ Internal .'hese are cost savings that accrue to a r regardless of the industry, arket orenviron ent in which it operates.[ E'ternal .'hese are econo ies that "ene t a r "ecause of the way in which its industry isorganized.

,iseconomies of scale )cono ies of scale, however, have a dark side, called disecono ies of scale.

'he larger an organization "eco es in order to reap econo ies of scale, theore co ple it has to "e to anage and run such scale. 'his co ple ity incurs acost, and eventually this cost ay co e to outweigh the savings gained frogreater scale. In other words, econo ies of scale cannot "e gleaned for ever.

'here is a li it to how "ig an organization can "eco e without the anagerslosing control of it. If a "usiness keeps e panding coordination ay "e lesseMective, lines of co unication "reak down and strikes occur as workers feelore re ote fro anage entQ in turn this will disrupt production elsewhere inthe factory.Khen this occurs, costs per unit produced will rise and the "usiness e periencesdisecono ies of scale.

Economies vs ,iseconomies of scale

Economies vs ,iseconomiesof scaleEconomies of scope

)cono ies of scope is anecono ic theory statingthat co panies dealing witha variety of goods have"etter cost advantage thanthose specializing on theproduction of a singleproduct or services.)cono ies of scope are0e ciencies wrought "yvariety, not volu e0 %the

latter concept is 0 econo ies of scale 0&.Khereas econo ies of scale for a r involve reductions in the average cost %cost perunit& arising fro increasing the scale of production for a single product type,econo ies of scope involve lowering average cost "y producing ore products.

6or e a ple, GcNonalds can produce "oth ha "urgers and 6rench fries at a loweraverage cost than what it would cost two separate r s to produce the sa e goods.'his is "ecause GcNonalds ha "urgers and 6rench fries share the use of food storage,preparation facilities, and so forth during production.

Another e a ple is a co pany such as *roctor ( 3a "le, which produces hundreds ofproducts fro razors to toothpaste. 'hey can aMord to hire e pensive graphic designers

https://en.wikipedia.org/wiki/Economies_of_scalehttps://en.wikipedia.org/wiki/Average_costhttps://en.wikipedia.org/wiki/Economies_of_scalehttps://en.wikipedia.org/wiki/Average_cost


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and arketing e perts who will use their skills across the product lines. Because thecosts are spread out, this lowers the average total cost of production for each product.

)cono ies of scope are 0 e ciencies wrought "y variety, not volu e 0 %the latterconcept is 0 econo ies of scale 0&.

6or e a ple, any corporate diversi cation plans assu e that econo ies of scope will

"e achieved.Khereas econo ies of scale for a r involve reductions in the average cost %cost perunit& arising fro increasing the scale of production for a single product type,econo ies of scope involve lowering average cost "y producing ore products.

:alue Engineering%)eek *;&

,e"nition of value 0he term . quality! elegance!

prestige! etc. :alue of a product is the ratio of the orth or utility of the product to its price or

cost. :alue ? orth@price or function of product@cost

,e"nition of value It is obvious from above relation that the value of an i tem or service can be

enhanced by 9educing the price for the same orth! Increasing the orth for the same price! and 9educing the price and increasing the orth simultaneously.

Ase value5 It is a monetary measure of the qualities of an item that contribute toits performance.Cost value5 0he sum of labor! material and various overheads required to producethe item.

$rimary functions5 0he basic purpose of the product. Secondary functions5 ther purposes not directly accomplishing the primary

purpose but supporting it or resulting from a speci"c design approach.

:alue engineering :alue engineering helps in improving e ciency and e ectiveness of products!

systems and procedures. In general! :E does the follo ing5

It helps us to pinpoint areas that need attention and improvement.

https://en.wikipedia.org/wiki/Economies_of_scalehttps://en.wikipedia.org/wiki/Diversification_(marketing_strategy)https://en.wikipedia.org/wiki/Average_costhttps://en.wikipedia.org/wiki/Economies_of_scalehttps://en.wikipedia.org/wiki/Diversification_(marketing_strategy)https://en.wikipedia.org/wiki/Average_cost


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It helps in generating ideas and alternatives for possible solution to a problem.

It provides a method to evaluate alternatives. It provides a platform for dialogue. It records the logic behind the decisions. It improves the value of goods and services signi"cantly

:alue engineering %:E& or value analysis %:#&

:alue Engineering %:E& or :alue #nalysis %:#& is a technique to reduce materialscost by a scienti"c approach and analysis.

#ccording to (. ,. Miles! ed creative approach hichhas for its purpose the e cient identi"cation of unnecessary cost i.e.! cost hich

provides neither quality! nor use! nor life! nor appearance! nor customerfeatures.8 0echniques of :alue #nalysis and Engineering %*2D*& .

It should be noted that material cost account for about D+ to F+ G of the totalcosts in many industries and it should be reduced by all concerned. 0hrough ateam approach! Miles brought about changes in products to lo er their costithout a ecting their utility and quality.

$urchasing Systems and :endor 9ating %)eek *H&

$urchasing systems and vendor rating

Most manufacturing organisations spend more than D+G of their money formaterials! i.e.! materials soak up a substantial portion of the capital invested inan industrial concern.0his emphasi>es the need for adequate materials management and controlbecause even a small saving in materials can reduce the production cost to asigni"cant e'tent and thus add to the pro"ts.

4unctions of material management 0he material management functions consist of the follo ing5

Materials planning. $rocurement or purchasing of materials. 9eceiving and arehousing. Storage and store-administration. Inventory control. Standardi>ation! Simpli"cation and :alue-analysis. E'ternal transportation %i.e.! tra c shipping! etc.& and material handling

%i.e.! internal transportation&. ,isposal of scrap surplus and obsolete materials.

b3ectives of materials management

0he main ob3ectives of material management are5 0o minimi>e materials cost. 0o procure and provide materials of desired quality hen required !at the

lo est possible overall cost of the concern. 0o reduce investment tied in inventories for for use in other productive

purposes and to develop high inventory turnover ratios. 0o purchase! receive! transport %i.e.! handle& and store materials

e ciently and to reduce the related costs. 0o trace ne sources of supply and to develop cordial relations ith them

in order to ensure continuous material supply at reasonable rates. 0o cut do n costs through simpli"cation! standardi>ation! value analysis!

import substitution! etc.

b3ectives of purchasing department


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$urchasing implies procuring materials! supplies! machinery and servicesneeded for production and maintenance of the concern.

0he ob3ectives of purchasing department are5 0o procure right material 0o procure material in right quantities. 0o procure material of right quality.

0o procure from right and reliable source and vendor. 0o procure material economically! i.e.! at right or reasonable price. 0o receive and deliver materials #t right place! and #t right time

Stores management Stores management ensures5

0hat the required material never goes out of stock 6 0hat no material is available in %much& e'cess than required 0o purchase materials on the principle of economic order quantity so that

the associated costs can be minimi>ed6 and 0o protect stores against damage! theft! etc.

0his can be achieved by the follo ing5 # proper purchasing practice %i.e.! hen to order materials&. #n adequate procedure of receipt and issue of materials. $roper methods of storing materials. #n e ective system of physical control of materials.

# proper method of keeping store records.

4unctions of stores department and the duties of the storekeeper 0hey are given as follo s5

0o receive materials! goods and equipment! and to check them foridenti"cation.

0o receive parts and components hich have been processed in thefactory.

0o record the receipt of goods. 0o correct positioning of all materials and supplies in the store. 0o maintain stocks safely and in good condition by taking all precautions

to ensure that they do not su er from damage. 0o issue items to the users only on the receipt of authori>ed stores

requisitions

Inventory control #n inventory is a list of items or goods.

Inventory and stock control are used interchangeably in business circle.0here are various types of inventory depending upon the conte't or situations.4or e'ample! inventory in a library means the list of books! 3ournals! periodicals!furniture! fans! etc. # typical "rm carries di erent kinds of inventories such as5ra materials and purchased parts6 partially completed goods called ork-in-

process %)I$&6 "nished-goods or merchandise in retail stores6 replacement parts!tools! and supplies6 and goods-in-transit to arehouses or customers%called pipeline inventory&.

$urpose of inventories


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Before discussing di erent issues related to inventory control! e shoulddiscuss5 hat is the purpose of holding stocks in the "rst place1 Inventoriesserve the follo ing purposes5

- 0o meet anticipated demand. 0hese inventories are referred to as anticipation stocksbecause they are held to satisfy e'pected demand. E'amples of this type of demand arestereo systems! tools! or clothing.

- 0o smooth production requirements. 4irms that e'perience seasonal patterns indemand often build up inventories during o -season periods to meet overly highrequirements during certain seasonal periods. 0hese inventories are aptly namedseasonal inventories. Companies that process fresh fruits and vegetables deal i thseasonal inventories. So do stores that sell greeting cards! skis! sno mobiles! orChristmas trees.

$urpose of inventories

- 0o decouple components of the production-distribution system. 0he inventory bu ers permit other operations to continue temporarily hile machine breakdo ns areresolved. Similarly! bu ers of ra materials are used to insulate production fromdisruptions in deliveries from suppliers. 4inished good inventories are used to bu er

sales operations from manufacturing disruptions.- 0o protect against stock-outs. ,elayed deliveries and une'pected increases in demand increase the risk of shortages. ,elay can occur because of eather conditions! tra ccongestion! supplierstock-outs! deliveries of rong materials! quality problems! and soon. 0he risk of shortage can be reduced by holding safety or bu er stock! hich arestocks in e'cess of average demand to compensate for variability in demand and leadtime. (ead time is the time elapsed bet een the placement of order and its delivery.$ro"tability%)eek * J&

$ro"tability $ro"tability is the primary goal of all business ventures. )ithout pro"tability the

business ill not survive in the long run. So measuring current and past pro"tability and pro3ecting future pro"tability is very important.

$ro"tability is measured ith revenues and e'penses.9evenue is money generated from the activities of the business.

4or e'ample! if products are produced and sold! income is generated.=o ever! money coming into the business from activities like borro ingmoney do not create income. 0his is simply a cash transaction bet eenthe business and the lender to generate cash for operating the businessor buying assets.

E'penses are the cost of resources used up or consumed by the activities of thebusiness.4or e'ample! seed corn is an e'pense of a farm business because it is used up in the

production process. 9esources such as a machine hose useful life is more than oneyear is used up over a period of years. 9epayment of a loan is not an e'pense! it ismerely a cash transfer bet een the business and the lender.

Kenerally! pro"t is the di erence bet een costs and revenue. #ccounting pro"t and economic pro"t may sound similar! but they actually have ma3ordi erences in ho they measure a companyLs "nancial health.Economic pro"t takes into consideration e'plicit costs and implicit costs ! hileaccounting pro"t only utili>es e'plicit costs.

#ccounting pro"ts tend to be higher than economic pro"ts as they omit certain implicitcosts! such as opportunity costs.

#ccounting $ro"t # ccounting pro"t consists of revenue minus e'plicit costs. $ro"t has been de"ned as the e'cess of revenue over costs incurred by a

business. In this sense e are merely looking at those costs and revenuesincluded in a company8s pro"t and loss account %Income Statement&.

http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/opportunity-costs.asphttp://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/opportunity-costs.asp


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Kross pro"t is the di erence bet een a company N+H26s total revenues or salesof its products and services! and the direct costs associated ith producing andselling a companying this di erence$ro"t ma' ? 09 ma' R 0c min

0he marginal revenue R marginal cost perspective is based on the factthat total pro"t reaches its ma'imum point here marginal revenueequals marginal cost.

MC ? M9! then $ro"t ma'

0otal revenue - total cost perspective

0he three ma3or "nancial statements5*. 0he balance sheet or statement of "nancial positionJ. 0he income statement @ 0he pro"t and loss account

http://www.investopedia.com/terms/e/economicprofit.asphttp://www.investopedia.com/terms/o/opportunitycost.asphttps://en.wikipedia.org/wiki/Economicshttps://en.wikipedia.org/wiki/Short_runhttps://en.wikipedia.org/wiki/Long_runhttps://en.wikipedia.org/wiki/Pricehttps://en.wikipedia.org/wiki/Output_(economics)https://en.wikipedia.org/wiki/Profit_(economics)https://en.wikipedia.org/wiki/Marginal_revenuehttps://en.wikipedia.org/wiki/Marginal_revenuehttps://en.wikipedia.org/wiki/Marginal_costhttps://en.wikipedia.org/wiki/Marginal_costhttp://www.investopedia.com/terms/e/economicprofit.asphttp://www.investopedia.com/terms/o/opportunitycost.asphttps://en.wikipedia.org/wiki/Economicshttps://en.wikipedia.org/wiki/Short_runhttps://en.wikipedia.org/wiki/Long_runhttps://en.wikipedia.org/wiki/Pricehttps://en.wikipedia.org/wiki/Output_(economics)https://en.wikipedia.org/wiki/Profit_(economics)https://en.wikipedia.org/wiki/Marginal_revenuehttps://en.wikipedia.org/wiki/Marginal_cost


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H. 0he statement of cash 7o s*. 0he balance sheet

0he balance sheet is made up at a point in time and is like a photograph.It sho s the things of value that the business o ns or is o ed %assets&together ith money o ed to creditors %liabilities&.0he balance sheet de"nes the orth of the company to the shareholders!represented by the e'cess of assets over liabilities.

# number of other features are also sho n! such as ho the resourceshave been utili>ed and! in combination ith the $ ( account! ho ellmanaged! resourced and stable the business really is.

J. 0he pro"t and loss account %$ (& 0he pro"t and loss account %$ (& is the

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